U.S. Treasurys end mixed after data

Unanticipated jump in housing sales earlier drove yields higher

By

KateGibson

LisaTwaronite

NEW YORK (MarketWatch) -- U.S. Treasury prices ended mixed, with the longer dates recovering some of the ground lost earlier Friday after new home sales figures topped forecasts, but continued pressure on the short end of the curve indicated some of the recent crisis mentality is abating.

"The better round of data today continues to feed the decline in risk aversion that has been pressuring the curve flatter," said analysts at Action Economics.

The Treasury yield curve refers to the spread between rates of short- and longer-term issues.

The benchmark 10-year note was 5/32 higher at 100 31/32. Its yield
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which is a reference for mortgage and corporate borrowing, was at 4.63%. On Monday, it ended at 100 27/32, with its yield at 4.64%.

The 30-year bond was up 26/32 Friday at 101 24/32 with a yield of 4.89%, while the two-year note fell 2/32 to 100 20/32 with a yield of 4.29%.

The three-month T-bill, which rallied earlier this week, was also lower Friday, sending its yield up 32 basis points to 4.23%, suggesting investors may be more optimistic about credit market conditions. On Monday, the three-month bill gained 80 basis points, with the yield ending down at 3.07%.

"I'm not sure I'd say 'confidence' yet, but it's at least less fear, and more of a normalization process" from the crisis mentality that gripped markets earlier this week and late last week, said Kim Rupert, managing director of fixed-income analysis at Action Economics.

"Flight-to-safety buying has dissipated and is even being unwound a little, but yields are still below the Fed funds target" of 5.25%, which shows that investors are still wary enough to prefer holding short-term bills, she said.

Upbeat data

The Commerce Department reported sales of new homes increased 2.8% in July to a seasonally adjusted annual rate of 870,000, with sales stronger than expectations of 820,000. See full story.

The figure suggests the housing market was stabilizing ahead of the crisis in credit markets.

Earlier, the government reported orders for U.S.-made durable goods jumped 5.9% in July, far exceeding the expected 1.5% gain forecast by economists. See full story.

"Keep in mind this was a July number when consumers were still confident and giddy," said Giddis.

"There are a wide variety of reasons to discount today's strong report on durable goods orders for July, but the figure will nonetheless increase doubts over whether the Federal Reserve will lower interest rates again," said Tony Crescenzi, Miller Tabak & Co., in a Friday report.

Interest-rate futures indicate lowered bets the Fed will cut its overnight lending rate between banks by half a percentage point to 4.75% by the Sept. 18 Federal Open Market Committee meeting. Futures point to a 64% chance of a cut to 5%, vs. a 40% chance one week ago.

"From all we can gather calm, perhaps, has come to the credit arena in that nothing much is being done. But liquidity and price discovery remain extremely elusive and such a log jam will require more drama, call it dynamite to get the logs at least moving," wrote David Ader, a bond strategist for RBS Greenwich Capital, who continued to expect a rate cut.

Other Markets

While Treasury initially prices declined after the data, U.S. stocks gained, with the Dow Jones Industrial Average
DJIA, -0.67%
posting triple-digit gains in the final hour of trading. Major indexes scored weekly gains of over 2%. See Market Snapshot.

Overseas, stocks fell across most Asian markets after the Bank of China disclosed nearly $10 billion of exposure to securities backed by U.S. subprime mortgages. See full story.

The dollar edged higher against the yen, with the greenback up 0.1% against the Japanese currency at 116.07 yen. The euro climbed 0.6% at $1.3633, while the British pound was up 0.3% at $2.0091. See Currencies.

Crude-oil prices ended higher, but still posted a weekly loss of 1%, with crude oil for October delivery rising $1.26 to $71.09 a barrel. See Futures Movers.

At the New York Mercantile Exchange, gold futures climbed, with rising demand pushing the metal to a $10.70-an-ounce gain for the week. Gold for December delivery closed at $667.50 an ounce, up $9.10 for the day, or 1.6% for the week. See Metals Stocks.

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